An easy way to calculate your gains from automatic 401(k) features
Posted on 28 June 2008
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/an-easy-way-to-calculate-your-gains-from-automatic-401k-features
The respected Employee Benefit Research Institute (EBRI) released new research this week that attempts to quantify how much more the average worker will gain through automation of 401(k) retirement savings plans at work. I wrote recently about the surging use of automated retirement portfolio management; the new EBRI study claims to be the first of its kind to quantify how a broader set of automated enrollment features will boost retirement saving across a range of income levels.
Automatic portfolio management means that new employees are defaulted into participation in 401(k) plans; it also means savings rates are automatically increased over time, and that contributions are placed into a default mix of investments appropriate for the participant’s age. All these changes were spurred by enactment of the Pension Protection Act of 2006 (PPA) as part of an effort to boost Americans’ retirement security.
EBRI found that the gains can be very significant. The analysis shows that workers currently age 25-29 participating in an automated plan would see an increase in portfolio value at age 65 of of 2.4 to 2.6 their final earnings. Here’s what that means:
Say you’re automatically enrolled in your employer’s 401(k) plan sometime in your 20s. Then, let’s say that you retire at age 65 with a final salary of $100,000 per year. EBRI calculates that your retirement account will be somewhere between $240,000 and $260,000 larger than if you hadn’t participated in an automated plan.
August 10th, 2008 at 9:10 am
I have a traditional IRA with $79K in it. I will be 71yrs old on 9/7/08. Will I be contacted by someone to give me the amount I need to take out each month? I understand it is a fixed amount, probably by the IRS, whwn does this happen or who should I notify?
August 10th, 2008 at 9:43 am
Claudia,
Your financial institution should alert you to the minimum distribution requirements for your IRA. But in the end, it’s your responsibility, and there are substantial IRS penalties if you don’t begin to withdraw the minimum amounts after you reach age 70 1/2. Your financial institution or accountant should be able to provide guidance on how much you need to withdraw; there’s also a very detailed page of information on this at the IRS website at http://www.irs.gov/publications/p590/ch01.html#d0e6219.
You also can find numerous online calculators to determine your minimums, including Kiplinger’s and Bankrate.com:
http://www.kiplinger.com/php/ira/answer.html?age=27.4&ira=79000&Submit=Submit
http://www.bankrate.com/brm/calculators/retirement/ira_minimum_distribution_calculator.asp
August 10th, 2008 at 7:31 pm
Mark, Thanks for the rapid response,I plan on a visit to my financial institution Monday!
I was also a nurse for 45yrs, and took Social Security Disability Retirement at age 62, in 2000.
Hospitals then were not offering plans of any type, but a move to Texas found a bank in 1982 offering 18% interest, that is when I started my IRA,of course it went downhill quickly!
Again, thank you,will be looking forward to future columns! CC